Hey guys, welcome back to the show. Today we're going to talk about investment thesis, how to build one, how to formulate one, what it is, why it's good for a fund. So today should be a fun episode. I think we're going to get into the weeds and kind of connect a lot of the pieces that I think are missing when going on the initial first stage of even thinking about what your fund is or what you want to do.
Yesterday I was actually on a coaching call with one of our mastermind students and we were sat down and started to talk. He said, Bridger, because I get all the other stuff. I get how to do capital. And our mastermind program is very extensive.
We go very deep on fund management, how to raise money. He goes, I understand all that. He goes, I'm having a problem figuring out what to invest in. Like the first step, do you guys remember the fund launch formula?
We'll snap over to the whiteboard of truth and justice here. A lot of truth, a lot of justice happens on this whiteboard. So let's snap in to the whiteboard.
So remember the fund launch formula. You have four steps. Number one is find an amazing deal.
Two, frame that out. Three, pitch investors. I'll just put a little money sign.
And four, legal docs. And you do that in that order, okay? If you pitch investors and no one likes it, well, guess what? You go back to the beginning and you find another deal.
You find a different investment thesis. And then when you raise money here, you get soft commitments from investors. Then and only then you go and raise your legal docs, right?
You guys have heard this before, you know it. So his question was, Bridger, I get all that, but how do I find the deal? And what types of deals should I look for?
How can I navigate this marketplace and figure out my investment thesis? Now, in this video, I'm not going to tell you exactly what to invest in because I really can't, right? You got to decide. But I want to give you some options and a formula for breaking out that first section of finding good deals.
Does that sound fair? All right, let's hop into it. So what is an investment thesis?
First off, an investment thesis is your argument. for why you should be taking someone's money and investing it for them. It's your argument of why you can beat the market or why your investment's safer than the market or why essentially someone should put money with you and where you believe you can find alpha inside of your fund. Now, I've given you lots of fund examples and stories. One fund I think is amazing, this fund from the 90s called Long-Term Capital Management, okay?
And I'll put LTM, Long-Term Capital Management, sneak a C in there right there, Long-Term Capital Management, okay? What their entire investment thesis was, was this. multi-billion dollar fund one of the biggest funds in the 90s this is all they did they said hey in the u.s there is the 30-year bond and a lot of people know the 30-year bond they like to buy it and they will buy this bond now there are very few people know about this it's the 29.75 year bond almost the same exact bond but not a lot of people know about this.
And in stock markets, because it's a public market, the stock price isn't determined by the value of the company. You've seen that this year, right? We have companies with these crazy evaluations, right?
I think I actually read a recent market. market study said right now in 2019, 2020, there has been the least correlation between stock price and actual revenue of the company than ever before. It's like a 4% correlation. So if you think, oh, revenue goes up, stock price should go up, right?
Not so apparently. This is about a 4% to 5% correlation between the two right now. The stock price is not determined by the value of the company or value of the bond.
It's determined by how many buyers and sellers there are. So because the 30-year bond was a more positive, popular bond, people would come and overbuy this bond. It would put the stock price up a little bit more above the 29.75 year bond.
So what long-term capital management, all they did, their investment thesis, their main investment thesis was we are going to short the 30 year bond. and we are gonna buy the 29.7 year bond because there is a pricing difference between the two when they should be just about the same. One is overbought and one is underbought.
A multi-billion dollar fund was built off of that small investment thesis, just focusing on two different bonds and a pricing difference between them. So your investment thesis doesn't need to be some crazy, man, we're gonna buy this and take it to Russia and sell it and we're gonna, it doesn't need to be crazy, right? A lot of investing theses actually are very simple, but effective.
Now to finish the story. story on long-term capital management. What happened was Russia defaulted on their bonds.
And this is after almost a decade of long-term capital management, very famous, successful fund. Russia defaults on their bonds. So all these Russian investors flee the Russian market and they flood into the 30-year bond and buy it up like crazy.
Buy, buy, buy, buy, buy, buy, buy, buy. And because they had a short on the 30-year bond, eventually they got squeezed out and they had to cover their short. And we're We'll go into shorts in a different episode what that means. But they cover their short.
They had to buy back the bond at a higher rate. And they lost a lot of money. And eventually, they had to close their fund. After a decade, really good run they had at long-term capital management.
So funds are, you know, that's... And their investment thesis apparently was not sound. It was not bulletproof against a Russian default on their bond.
They didn't put that into their investment thesis. Now, are those guys all losers and gone now? No, they made actually a lot of money in those 10 years. Yeah, failed at the end.
end. And I don't know how much investors lost or if investors even lost money, but I knew they shut down their fund, but a lot of money was still made in those 10 years, just FYI. What I'm saying is don't go set up a crappy investment thesis and try to just screw everybody over. But just so you know, even if it kind of fails after 10 years, those 10 years are still good and still made you money.
And those guys are probably sitting pretty nice right now. All right, enough of that. Don't be fraudulent. Set up good funds, set up good investment theses. But that was one example.
All right, so Bridger, how do- do I actually set up my investment thesis? What does that look like? So when you're developing an investment thesis, the first thing I would say is lean into. your team's experience.
So the coaching call yesterday, the guy I was talking to, he had a lot of experience in running and owning his own gym. And that was his experience. And he was asking me, Bridger, can we, you know, can I do a fund in AI or can I do a fund in other stuff?
And I said, yeah, you can. But I would say lean into your current experiences you already have. If you already know gyms really well, what's wrong with buying up 30 gyms and taking them and having almost a value add fund, take those, that group of gyms and take it to a larger. company, maybe at any time fitness saying, Hey, you can buy these gyms for this whole portfolio of companies or taking it to a private equity fund, a bigger fund, a venture capital fund, and our hedge fund, whoever likes to buy these types of things and say, Hey, I've got 30 gyms. How would you like to buy all 30 of these gyms as a portfolio?
They're all running. Well, it's all under one roof. I have a friend. All he does is buys up funeral homes, groups them together into a package and sells them to private equity firms who like to buy packaged funeral homes. And he'll go, what he does is he buys those funeral homes for for about $8 million total.
He'll probably buy like four or five of them. And he found that he can sell them on the public markets if they're grouped together for almost double. So he'll sell that for about $15 million. And him and his investors split the $7 million difference. And if you're doing 80-20, that means he took home $1.4 million on that transaction.
Not a bad investment thesis, right? All he did was he found big PE funds. And he went and talked to them and said, hey, what exact, what types of deals are you exactly looking for?
What would be the perfect deal for you? And they said, well, we would love to buy up these small, small types of businesses and funeral homes would be awesome. And we have this whole sector and this investment thesis of ours. where we want to manage hundreds of funeral homes.
We want to group them together into a bigger portfolio. And he goes, great. Well, if I brought you X, Y, and Z funeral home, would you like to buy those?
And they say, yes, we'd love that. So then he goes out and starts looking for those deals, finds the deal, and then brings- brings it to them and they give them an offer. So the gentleman I was talking to yesterday said, well, why don't you ghost out your deal? Essentially what you can do, and back to the fund launch formula of finding that deal, framing it out, that frame part is go to a PE fund, ask them what types of things they would like to buy, what types of businesses, what type of portfolio companies would they like to purchase?
Now, a lot of PE funds are going to be too big. They want to buy like JCPenney or Hertz, right? These distressed assets.
It's not going to be for you. You got to find the right type of PE fund that's looking for maybe small business acquisitions. or other types of portfolio companies that you can go out and scout and find for them.
And I said, there's probably a fund out there that loves to buy gyms. So if you went and found a PE fund and said, hey, you like to buy gyms? They say, yeah, what is the perfect gym for you?
What does it look like? How many clients does it have? What's all going on inside of the gym? And so what we like X, Y, and Z. And you go out and look for gyms that maybe they have X and Y and you can come in and value add.
to that gym that grew or the group of gyms you buy up let's call it nine gyms and take it to that PE fund and sell it to them now before you go buy the gyms I would ghost put these say hey I let's say I theorize I have nine gyms I'm already everything's lined up the PE fund is lined up say hey if I brought you these nine gyms and they're in certain conditions condition, would you buy them? And what would that multiple look like? And say, well, we would buy them for X amount of dollars. You say, great.
You go then syndicate money together or raise money in a fund, go and buy those nine gems and take it to the PE fund and sell. And if there's things you need to fix up on them, great. It's a value add fund. You can.
Fix some of those gyms up, get more people in there, get more clients because you know gyms so well. You've already run a gym. You know how it works. You know how to find clients. You know how to land and build that type of business.
And investors are much more keen to give you money when you've previously had operational experience. Now, Bridger, wait. What if I don't have any operational experience? What do I do then?
Number two is you can partner with someone who has it. He was asking me, Bridger, I really want to do stuff in artificial intelligence. Should I spend the next 20 years learning about artificial intelligence?
intelligence. And he said, well, you could, but what if in 20 years... AI just isn't that cool anymore.
Something else came out and that's the new thing. You spent 20 years trying to research something that didn't benefit you anything. He goes, oh, that's a good point. So what you can do is find people who have already studied it for the last decade and already are up to speed on everything that's happening in AI. If you go back to our three circles, right?
You have your expert investor, your fund manager, and your money raiser circle. Every fund needs those three pieces. So usually I do not tell people to go out and start trying to learn AI for the next 20 years so you can start a fund to build it. It is way faster and more efficient to just find someone and partner with these engineers who are amazing at AI, but just have no clue how to set up a fund, how to find the SEC, how to even raise money. And you can solve those problems for them.
And to a potential investor, you say, hey, this guy's got a PhD from X university. He's done very well. This is why we believe our investment thesis works is because he has such good smarts over there. I have great operational experience. I've ran a gym before in other businesses.
And this is what we're bringing to you inside of our investment thesis is we're going to to buy up AI business. We're going to invest in them and go out and grow them and sell them. So in general, again, I'm not going to tell you what to invest in, right? But I want to give you the landscape of what's going on. And what I do is I go out and date.
I date a lot of these investment ideas and theses. There's lots of different ways to make money. And I've gone through multiple of them in previous episodes of different funds that are out there just to give you ideas. And the best thing you can do for that step one, find the deal is go out and date these different investment theses.
Call up. It's you're just wasting time a little bit of time call up 30 private equity funds and probably smaller funds don't don't go be gone blackstone or kkr go call small time mid mid-tier funds ask them what they're looking for what they like to see and maybe you can do that value add fund go talk to banks ask them what distressed assets do you have right now that you're trying to get off your balance sheet and maybe it's real estate right maybe they've got oh we've got 13 buildings we're trying to get them off our balance sheet A lot of office space is going bad right now because of coronavirus. And you think, aha, maybe there's opportunity to buy some of those office buildings. And then what you can do is go over and try to find the buyers. Go over and find the people that would love to buy an office building.
Or on the PE fund, go say, hey, if you want nine gyms, start looking and trying to acquire gyms. Now, you don't have money yet, and that's fine. That's perfect.
You don't want money yet. You're still testing your investment thesis. For traders, you can do ghost trading. It's one of the easy, best things you can do. Now, I know things change when you have money, but if you're doing Forex trading, you can set up models where you ghost trade $35 million and test it out for six months.
See how effective your investment thesis is. And maybe it's got some holes in it and you got to tweak it and you got to edit it. And you got to say, oh, well, we're going to hedge against our bets here with this trade and currency over here. And you can pull on different levers and it builds your, first off, your confidence in your fund.
And secondly, it actually gives you experience and- gives you practice before you go in and actually take investors'money and do step three of the fund launch formula, which is go out pitching investors. And then step number four, setting up your legal docs and actually launching the fund. Too many people go out and say, first step is I'm going to set up legal docs.
Second step, I'm going to raise money. And then I'm going to kind of figure out, keep going on my investment thesis. First step is you want to have your investment thesis locked in.
You want to have everything test out. You've looked under every rock, down every nook and cranny. You figured it all out.
And yes, I just said nook and cranny, okay? You figured it all out. You've gone down there and you can come to an investor confidently and pitch them your investment thesis.
And that's why syndications are so beautiful. Probably to even further test out your investment thesis is the first deal you'll do is actually going to be probably a syndication deal where you syndicate money. for multiple investors into a simple LLC it's not a fund yet it's just a simple LLC you go out and do the deal and tada you made money and your investment thesis worked and now let's scale through a fund you guys have seen our syndication verse fund video you can go back and watch that that walks you through that process so again I'm not gonna tell you what to invest in but I want to give you examples give you ideas and the frameworks for how people like us think about investing and think about playing bigger And the best, funnest thing about this is you get to go out and make decisions if there's really no cost, right?
There's no money limitations on you because funds are so scalable. You can say, I don't care if the deal is, you know, $7 million or $700 million. I can figure it out. If it's a good enough deal, remember back to our Lamborghini example, right? Where my dad sat me down and said, Bridger, we found a Lamborghini in Billings, Montana.
It's $50,000 and we can sell it for 150 grand this weekend. Could you go out and raise? 50 grand. And I, and I've told the story before, but I say, I said, maybe, yeah.
And he goes, could you talk to, you know, friends, an uncle, a former college professor of Boston raised $50,000 by Saturday. It's guaranteed. The Lamborghini is checked out. We have a mechanic look at it's all legit. You'll make 150. 50 grand this weekend if you can find that $50,000 by Saturday.
And I said, yeah, I think I could do that. He goes, well, what about $100,000? Could you find $100,000? It's guaranteed you're gonna make a hundred grand by this weekend. And I said, yeah, I think so.
He goes, why? And I go, the deal is so good, right? If you have a good enough deal, a good enough investment thesis, money will find you. There is so much money in this, on this world, especially with the Fed printing new trillions of dollars a day, right?
There is so much money on this planet. A lot of people think money. is locked in, there's a finite amount.
Just to put it in perspective, banks regulate pretty much a lot of what happens with our currency and how much money there's out there. Right now, when you put a million dollars into a bank account, the bank can lend out $16 million of loans. It's called the Federal Reserve Rate. They need to reserve 1 16th of what they can make in loans.
So when you deposit a million dollars in your bank account, they can go, they essentially create $15 million instantly and can put that into loans. Pretty interesting, right? And we're gonna have a whole, I'm not gonna dive into the whole Fed and all that stuff, but money is not like when you make a dollar, you're taking it from somebody else.
It's not a zero-sum game. There is so much money out there to be made. You could carve off a... $100 million and no one even noticed.
No one even blink an eye. If you carve that out of the markets right now, we need to play bigger. Me and you included, myself included to play bigger and funds are the way to do it.
Especially when you have an investment thesis that you've gone out and test that you can ghost model the entire thing first when finding that deal to framing it out, how investors are going to get paid three, then go in market test, pitch your investors, see what your investors, the market says about your investment thesis. And they're going to poke holes in it and maybe got to go back and reformulate it. But that is the best.
best market testing ever. And then step four of the fund launch formula is go and do your legal docs and actually launch and scale your first syndicate or your first fund. So hopefully that all made sense.
Kind of a longer episode today, but I think it was important to talk about investment theses. Now in the next couple episodes, I want to give you more examples of investment thesis. Today was kind of the overview. I want to give you more examples breaking down.
What is an investment thesis and different types of investment thesis inside of private equity firms? They have specific ones there. Inside of venture capital firms, what type of thesis they have or hedge funds?
I want to break these down for you and it's going to be, I think, a lot